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Barrack: ‘Everybody talks about scale’

Colony Capital has agreed to merge with two NorthStar companies to form what would become the fifth largest global real estate manager in the world.

Colony Capital has reached an agreement to combine in “an all-stock merger of equals” with NorthStar Asset Management (NSAM) and NorthStar Realty Finance (NRF) to form a new real estate investment trust, the three companies announced Friday. The company, which will be called Colony NorthStar, will have total assets under management of $58 billion.

Thomas Barrack, founder and executive chairman of Colony Capital, said a major driver for the merger was to create an entity that would be significantly more competitive in the marketplace. “The world is changing and everybody talks about scale,” he said, speaking during an analyst call Friday morning. “The reason we’re so enthused about this is it would take decades for any of the three companies to not only achieve the scale in AUM, but to find those silos, with athletes that are in those silos, for proprietary deal sourcing on one side, and all the verticals for distribution on the other. Now we have institutional distribution, public distribution, retail distribution, and you’ve got best-in-class athletes, and basically 16 varying businesses today combined.”

Barrack noted that the combination would also respond to the growing trend among institutional investors to scale down their base of investment managers in favor of fewer, longer-term relationships. “I think we’re amazingly positioned for the next round of scrutiny to come from that institutional market, which wants scale, athletes, proprietary deal sourcing and other verticals,” he said.

Added David Hamamoto, executive chairman of NSAM and chairman of NRF: “What we wanted to do was adjust to the market and try to make sure that we’re sentitive to what shareholders want. Given what we see in the market and the strength you see with someone like Brookfield out there or even a smaller version of this, with someone like Kennedy Wilson and how well they’re trading, we thought this would be a great way to emulate what the market likes. And I think with our size, we’re ranked fifth in terms of AUM among these global real estate leaders, so the combination creates power, whether it’s information, relationships, global reach.”

According to an investor presentation posted on all three companies’ websites, Colony NorthStar would rank fifth among global independent real estate managers, behind Brookfield with $144 billion in real estate AUM, Blackstone with $101 billion, CBRE Global Investors with $90 billion and Invesco with $64 billion.

The transaction, which has been unanimously approved by Colony’s board of directors and NSAM and NRF’s special committees, is expected to close during the first quarter of 2017. Upon completion of the deal, Colony shareholders will own approximately 33.25 percent of the new company, while NSAM shareholders will hold approximately 32.85 percent and NRF shareholders approximately 33.9 percent.

Upon closing of the transaction, Barrack will be executive chairman of Colony NorthStar, while Colony chief executive and president Richard Saltzman will become chief executive. Hamamoto will be executive chairman of the new entity.

The merger agreement comes just a month after Colony, NSAM and NRF announced that they were in exclusive negotiations regarding a three-party merger. In January, NSAM had disclosed that they were exploring strategic alternatives for the company, including a possible sale.

BofA Merrill Lynch acted as lead financial advisor to Colony on the transaction, with Barclays, Credit Suisse, Deutsche Bank, JP Morgan and Morgan Stanley also acting as financial advisors on the deal. Willkie Farr & Gallagher served as legal counsel to Colony, while Hogan Lovells acted as tax and Maryland counsel to the firm.